How does IR35 status affect pay? Compare inside and outside IR35 rates

The take-home pay from an inside IR35 contract is significantly lower than the take-home pay from an outside IR35 contract.

That might sound obvious, but it’s not just contractors and their accountants who know this -- end-clients are aware of the adverse financial implications of being caught by the off-payroll rules too. And so clients are increasingly dangling more cash in front of these contractors.

In other words, clients are throwing more and more money at inside IR35 contracts to ensure those contracts don’t get left on the shelf -- some 26% more, if our predicted calculations are correct, writes Matt Collingwood, director of IT recruitment agency VIQU.

The IR35 context

Before we compare inside and outside IR35 rates from our database, be aware of the context:

• According to Brookson, 75% of businesses have been forced to raise contract rates by more than 10%.

• According to Qdos, 64% of contractors have secured an outside IR35 contract since the reform of IR35 in the private sector on April 6th 2021.

(N.B. This apparently represents a massive 83% increase on the contractors - 35% - who were deemed outside IR35 by their engagers in the lead-up to the April reform).

Inside v Outside rate range – across all IT skills and industry sectors

• Between April 2020 and September 2020 – so when IR35 reform in the public sector was in force, but when IR35 reform in the private sector was still some way off, there was a 14.05% variance between outside and inside IR35 contracts.

Put another way, inside IR35 contracts offered 14.05% higher rates than outside IR35 contracts between April 2020 and September 2020.

• Between October 2020 and March 2021, the variance between outside IR35 and inside IR35 opportunities increased to 20.0%.

This means in the six months before private sector IR35 reform took effect, rates for inside IR35 contractors leapt by 5.95 per cent. The result? Outside IR35 assignments offered contractors a fifth less, in the pay stakes, than inside IR35 assignments.

• Between April 2021 and September 2021, the variance between outside IR35 contracts and inside IR35 contracts notched up further -- to 22.8%.

So, contracts captured by IR35, in the six months since IR35 reform was introduced, paid 22.8 per cent more than contracts not captured by IR35.

•   Between October 2021 to present (mid-January 2021), the variance between outside IR35 contracts and inside IR35 contracts climbed to just over 24.2%

From this trend of the gap between ‘outside’ and ‘inside’ rates getting wider and wider (reflecting that clients have to make the decision to pay out more for inside IR35 resources), we now forecast a minimum variance of 26% by the end of March 2022.

Which clients have the biggest pay gaps between inside and outside IR35 contracts?

Companies paying the most for Outside v Inside contractor roles:

• Finance, Insurance, IT/Communications, eCommerce, Digital Marketing.
• Companies with 10,000+ FTEs.
• Skillsets including DevOps, Cloud, BI, Development.

Companies/sectors/engagers paying the least for Outside v Inside contractor roles:

• Retail, Hospitality, Third sector, Local Authorities, NHS Trusts.
• Companies with <500 FTEs.
• Skillsets including BAU Infrastructure Support, Business Analysis.

Lastly, what other factors determine IR35 status pay?

As accountants are right to point out, it is difficult to specify, categorically, the cost of outside versus inside IR35, in terms of contractor take-home pay. The variables are numerous. And it should be remembered that the reformed Intermediaries legislation is not the only factor affecting the pay variance between outside IR35 roles and inside IR35 roles. For example, Retail and Hospitality would likely pay more to inside IR35 contracts had those sectors not been decimated by covid-19.

Demand for talent also plays a big part in how much engagers are willing to stump up. Currently, demand is high, so it’s not massively surprising that contractors are being given a healthy number of opportunities to work outside IR35, which inevitably raises rates across the board.